The Washington Consensus and Asymmetric Growth

According to the program of economic reform known as the “Washington Consensus”, one of the expected effects of trade liberalization is a rapid expansion of exports from lesser developed countries (LDCs), including labor-intensive manufactures. The idea is that this will improve micro- and macroeconomic performance and stimulate overall growth, since the economy-wide behavior in LDCs tends to depend quite critically on what happens in the export sector. Yet for Mexico from 1981 to 2004 a remarkably dynamic growth of exports—non-oil exports grew, on average, at 13.4% per year—has been associated with a surprisingly poor growth performance of gross domestic product (GDP)—an annual average rate of just 2.1%. Furthermore, as population grew at 1.6% during this period, GDP growth became negligible in per capita terms. The resulting "asymmetric" or "unbalanced" growth has relegated the economic masterminds behind the Washington Consensus to the popular status of "peddlers of dreams".

The failure of Mexico to cultivate widespread economic growth in an environment of explosive export growth is the most unexpected outcome of the reform process begun by President De la Madrid. This failure is best explained by the growth of the “maquiladora” industry. The term "maquiladora" is used for firms that are highly labor intensive and end-of-value chain assembly-type operations. Proximity to the US and trade liberalization opened up opportunities to develop these type of activities, particularly in the frontier states with the US. The maquiladora industry is so dangerous as a model of economic development because there is no incentive to invest in increased labor productivity. By virtue of the nature of the industry itself and the characteristics of the labor market, capital can grow by simply adding more cheap labor. Between 1982 and 2000, the sector was able to absorb more than 1 million workers while not only successfully resisting upward pressure on wages, but actually pulling off a significant cut in real wages. Indeed, the industry also seems designed to minimize the creation of production linkages (forward and backward) with the rest of the economy. Since so many maquiladora companies are owned by foreign corporations, a large degree of “transfer pricing” or pricing with the intent of producing no profit for the local company probably occurs in spite of substantial tax concessions from the state. The lack of domestic linkages ensures easy international mobility, and anecdotal evidence abounds suggesting that Mexico has lost hundreds of thousands of maquiladora industry jobs to China in the past decade.

In 2000, South Korea had a manufacturing industry with a level of exports similar to that of Mexico ("maquiladora" and "non-maquiladora" manufacturing exports together)—about $150 billion; however, Korea had a manufacturing industry generating twice the level of value added and only using half the level of imports of Mexico. Furthermore, Korea had relatively low levels of manufacturing imports despite a substantially higher level of investment in machinery and equipment, which traditionally have a high import component. Considering South Korea’s disadvantages to Mexico with regard to the Washington Consensus Model, this is a startling outcome. Yet it is also explicable in terms of the comparative absence of the maquiladora industry in South Korea. Because capital in South Korea can only consistently grow in an environment of rising productivity, significant investments in worker productivity are encouraged. In contrast, Mexico provides the paradigm case for the failure of the neoliberal model advocated by the Washington Consensus.

One of the main reasons why investment performed badly after the reforms is precisely that capital could easily end up having little incentive to invest. In this new investor framework, as capital (domestic or foreign) can increase its accumulation rate (at least for a long period of time) either via stagnant wages (in sectors with productivity growth) or via shrinking ones (where there is none), why should it make a significant investment effort? Furthermore, if in the new equilibrium of the labor market, labor loses the property rights it had over the benefits that may derive from the use of this additional capital (increased productivity), labor also can end up having little incentive to acquire human capital. If all the benefits that might accrue from human capital accumulation go to capital, workers actually have a lesser incentive to invest in themselves.